Employee turnover disrupts daily operations, degrades customer service and is costly to a small-business owner. While an analysis of employee turnover data can be helpful to identify general reasons why employees leave, it’s also important to consider how much the business could save by reducing turnover, especially in high-turnover positions. A starting point is to choose and calculate turnover costs for a single high-turnover position.

Direct and Indirect Costs

Turnover in general is costly to a small-business owner because it involves both direct and indirect costs. While direct costs such as recruiting expenses, the time cost of interviewing candidates and training costs can be determined using a mathematical formula, an indirect cost calculation can be significantly more difficult. This is mainly because indirect costs such as lost productivity, decreased morale and decreased customer service levels involve qualitative assessments. If the position involves direct customer contact, the business owner also has to consider potential lost sales and even lost customers in turnover cost assessments.

Quick Direct Cost Calculations

Options for calculating the turnover cost for a single high-turnover position range from a simple percent formula to a detailed checklist involving numerous calculations. One calculation for an hourly employee is to multiply the employee’s annual salary by 30 percent. If an hourly employee has an annual salary of $23,000, the turnover cost for the position is $6,900. This method is only appropriate for a very small business or one that provides few employee benefits.

Salary and Benefits

Small-business owners providing, for example, a retirement plan, paid vacation and health insurance need a formula that incorporates benefits. Input requirements for this calculation include the total number of employees leaving the position in the previous 12 months and the annual salary the position pays. The calculation assumes the turnover cost for each employee is 25 percent of annual salary, plus 30 percent of the annual salary multiplied by 25 percent to account for employee benefits. Calculate, add and multiply the sum by the number of former employees. Assume, for example, the position pays $40,000 annually and 10 employees came and went over the previous 12 months. Total turnover cost per employee is $13,000 and total turnover costs are $130,000.

Comprehensive Calculation

A comprehensive calculation includes both qualitative and quantitative assessments. While this level of detail may be unnecessary for many positions in a small business, it may apply if the high turnover position is an upper level management or outside sales position. Comprehensive calculations break costs into costs due to the person leaving, recruitment, training, lost productivity, new hire costs and costs incurred due to lost sales. William G. Bliss, certified leadership coach and creator of “The Cost of Turnover” checklist, reports that using a detailed checklist can increase the cost of turnover to about 150 percent of an employee’s annual salary.

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About the Author

Based in Green Bay, Wisc., Jackie Lohrey has been writing professionally since 2009. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.